A monopoly can earn positive profits because it:

• A. produces at the point where price equals marginal cost
• B. must accept the market price as given
• C. faces a downward-sloping demand curve and can set prices above marginal cost
• D. cannot influence the market price due to competition

Answer: (C)

Verified step by step guidance

1. Understand the characteristics of a monopoly: A monopoly is a single seller in the market with no close substitutes, which means it faces the entire market demand curve.
2. Recognize that a monopoly faces a downward-sloping demand curve, meaning it can influence the price by adjusting the quantity it produces.
3. Recall that unlike a perfectly competitive firm, a monopoly does not produce where price equals marginal cost (P = MC). Instead, it maximizes profit where marginal revenue (MR) equals marginal cost (MC).
4. Since the demand curve is downward sloping, marginal revenue is less than price (MR < P), allowing the monopoly to set a price above marginal cost and earn positive economic profits.
5. Conclude that the monopoly's ability to set prices above marginal cost and restrict output leads to positive profits, unlike firms in perfectly competitive markets that are price takers and earn zero economic profits in the long run.